India Ratings offers stable outlook for banking in 2014

The larger private banks are expected to maintain their above-average capitalisation levels based on better access to the equity capital markets, the report noted.

PTI| Updated: Jan 30, 2014, 23:26 PM IST

Mumbai: Maintaining a stable outlook on the banking sector in 2014, India Ratings on Thursday said higher provisions for loan losses and capital infusion from the Government in public sector banks will make lenders resilient to any cyclical downturn.

"Banks are expected to remain largely resilient to the cyclical downturn as increases in loan loss provisions and common equity injections in 2014 will likely help them maintain adequate defences," Ananda Bhoumik, Senior Director and Head (Financial Institutions) at India Rating, said.

Bhoumik was talking to reporters while releasing a report, '2014 Outlook: Banks-Resilient, but finely posied'.

"These factors underline the stable outlook for the banking sector this calendar year, even as it continues to face credit quality pressures from loan concentration, borrowers' overleverage and the prevailing economic slowdown."

Attributing regulatory provisions to increase in loan loss reserves, Bhoumik said the reserves are likely to exceed 70 percent of gross NPAs from the current 66 percent.

"Regulatory measures are forcing banks to improve loan loss reserves on restructured loans and exposures to corporates with large unhedged forex liabilities."

"The removal of provisioning forbearance on restructured accounts from FY16 will improve loan loss reserves further," the report said.

It said the Government's estimated equity injection of USD 23 billion till FY18 provides considerable rating stability for Government banks and comfort to senior creditors.

The larger private banks are expected to maintain their above-average capitalisation levels based on better access to the equity capital markets, the report noted.

In a base case scenario, return on assets of government banks will continue to trend 15-20 basis points lower than the long-term average of 0.9 percent, but still adequate to absorb rising credit costs without impacting capital for most banks, Bhoumik said.

He further said stressed assets may reach 14 percent of loans by March 2015 from 9 percent in March 2013.

"By then, improvement in industrial activity on the back of a gradual pick-up in the investment cycle could slow NPAs accretion and improve recoveries in most sectors," Bhoumik said.

The rating agency expects NPA accretions to slow down from the second half of FY15 on the likelihood of higher economic growth driving corporate performance.

The report said infrastructure loans, which form a large and growing proportion of the overall loan book, remain a key risk to asset quality.

"Around 20 percent of loans to the sector have already been restructured and India Ratings expects that the quantum of stressed loans could double over the next two years."

On tier I capial, the report said the demand will remain modest in FY15 but will increase sharply in subsequent years.

Talking about funding challenges of banks, the report said many banks benefited from the loan slowdown in FY14 and reduced their funding gaps through lower dependence on bulk deposits but the structural imbalance may recur if loan growth picks up.

"Banks are not permitted to raise long-term bonds, which limits their ability to manage funding gaps and to fully transmit any easing in monetary policy," it said.